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(What’s Left of) Our Economy: The Experts Could Have it Wrong on Trade and Growth, Too

02 Saturday Jul 2016

Posted by Alan Tonelson in (What's Left of) Our Economy

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business investment, efficiency, growth, Mainstream Media, Neil Irwin, productivity, recovery, The New York Times, Trade, Trade Deficits, World Trade Organization, {What's Left of) Our Economy

Although I (justifiably) dump on the Mainstream Media constantly, I’m really kind of grateful for their continuing (though ever more precarious) survival and insistence on upholding even the most thoroughly debunked but still widely accepted beliefs. For as with Neil Irwin’s New York Times post yesterday, these organizations keep providing great opportunities for showing why this conventional wisdom deserves no automatic support at all.

Irwin’s subject was the generally agreed upon trade-off between (a) the freest possible global flows of commerce and the overall efficiency-spurred growth they foster and (b) the at-least-reasonable degree of economic equality that publics in America and throughout the high income world (think “Brexit”) value highly. And of course, being a Mainstream Media mainstay, Irwin accepts this trade-off as a given.

Not that he ignores the possible downside. Indeed, Irwin allows the possibility that “Economic efficiency isn’t all it’s cracked up to be,” largely because “the economic and policy elite may like efficiency a lot more than normal humans do.

“Maybe the people who run the world, in other words, have spent decades pursuing goals that don’t scratch the itches of large swaths of humanity. Perhaps the pursuit of ever higher gross domestic product misses a fundamental understanding of what makes most people tick.”

This apparent disconnect between the priorities of economic elites and the populations of countries with representative governments certainly amounts to a huge political problem. Irwin also acknowledges both the legitimacy and rationality of many voters’ evident emphasis on some non-economic priorities (like “[a] sense of stability, of purpose, of social standing”) over maximum growth.

But Irwin’s analysis still leaves intact the claim that, in the long run, opposing standard efficiency- and growth-focused policies, like continually liberalizing trade, will impose economic costs that are considerable and perhaps ultimately unacceptable. And that’s a big problem, because if you look at the actual numbers, there’s a strong case that Main Street Americans (and others) have the economics of this relationship right, too.

For example, as I’ve written repeatedly, the growth of U.S. trade deficits has retarded already sluggish overall American growth during the current recovery. And the Made in Washington portion of these deficits – characterized and fueled by the trade liberalization policy decisions of recent decades – has exacted the greatest growth toll.

In addition, U.S. economic growth before the early 1970s, when the first crucial decisions were made to keep America open to the exports of a developed world fully recovered from World War II, was considerably faster (and by all accounts more inclusive) than it’s been afterwards. If you’re skeptical, take a look at these charts, which compare the best pre-1970s American economic expansion (during the 1960s), with the best post-1970s expansion (during the 1990s).

This isn’t necessarily to say that American growth has slowed entirely or even largely because trade has increased. But there’s no shortage of valid reasons for linking the two. Consider the data-supported claims that a big reason for recent growth woes (even before the financial crisis and ensuing Great Recession) has been weak domestic business investment. I’ve pointed to evidence that the problem hasn’t been feeble capital spending as such, but a growing tendency for that spending to be made on multinational companies’ foreign facilities. It’s clearly reasonable to argue that such spending has been made a lot more profitable by trade agreements that encourage these companies to supply the high-price U.S. market from super-low cost foreign countries in the developing world.

Productivity statistics contain more reasons for doubting that more trade boosts efficiency. For just as economic growth has slowed as trade flows have surged, productivity growth generally has weakened, too. During the 1960s economic expansion, labor productivity grew by 28.96 percent in toto. By the 1980s recovery, this figure was down to 16.67 percent. It rebounded to 23.01 percent during the 1990s expansion, but has weakened dramatically since. (The figures on multi-factor productivity, a broader measure, only go back to 1987, but U.S. performance has weakened on this score, too.) Isn’t it plausible that, as more and more production offshoring of manufacturing – the nation’s longtime productivity growth leader – has proceeded, overall U.S. productivity growth would falter?

And don’t forget the slowdown in manufacturing’s own productivity growth. A reason to suppose that it’s not just production in labor-intensive sectors like apparel and shoes and toys has been sent abroad?

Finally, not even taking a global perspective strengthens claims that trade growth fosters overall growth. According to this source, the highest growth period worldwide (1961-1970) preceded that early 1970s period when U.S. trade growth, at least, took off. Reinforcement for this point: Figures from the World Trade Organization reveal that world trade in real terms was outgrowing world output by a greater margin after 1973 (1.72:1) than before (1.61:1).

Again, cause-and-effect are anything but conclusive here. And I’m sure that evidence can be found making the opposite case(s). But the big takeaway here is that the conventional wisdom on trade and growth is anything but unassailable – and that there’s an excellent chance that the trade-skeptic public understands the real relationship better than the self-appointed experts.

(What’s Left of) Our Economy: The Times’ Trade Deficit Pollyannaism

28 Monday Mar 2016

Posted by Alan Tonelson in Our So-Called Foreign Policy

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bubbles, business investment, capital flows, capital spending, China, competitiveness, currency manipulation, global division of labor, global financial system, investment, manufacturing, Neil Irwin, subsidies, The New York Times, Trade, Trade Deficits, U.S. dollar, {What's Left of) Our Economy

At least Neil Irwin’s New York Times article yesterday on the real meaning of trade deficits made two points rarely seen in journalistic examinations of the subject. He acknowledged that these shortfalls subtract from an economy’s size. (And should have added that worsening trade balances slow an economy’s growth – a big problem for the slow-growing United States these days.) And he noted that the foreign investment inflow triggered by deficits should be put to productive uses. Otherwise, it can create dangerously bubbly effects, as with U.S. housing and personal consumption during the last decade.

What Irwin didn’t discuss were the real-world obstacles created by trade deficits to using those capital inflows wisely, and unfortunately, they’re much more important and germane to policymakers and the public.

For example, let’s say that a country’s trade deficit is heavily concentrated in manufacturing (which America’s is). And let’s say that it partly reflects not only the dollar strength resulting from the central role played by the United States in the global financial system, but foreign countries’ policies of artificially undervaluing their currencies. If Washington didn’t respond adequately, wouldn’t many prospective investors balk at pouring money into domestic manufacturing for fear of having to compete not only with foreign companies, but with foreign treasuries? And wouldn’t a turn-the-other-cheek American policy toward other foreign subsidies produce similar effects?

Alternatively, a large manufacturing-centered trade deficit could inhibit productive domestic investment by killing off large numbers of manufacturing jobs – which have long been among the economy’s best-paying. Investors considering building new factories in America could understandably be dissuaded by the resulting reductions in family incomes – which could well ripple far beyond manufacturing as displaced industrial workers began competing for the jobs remaining in the service sector, and undermined its own wage growth.

Another live possibility: If U.S. trade deficits significantly reflected the offshoring activities of multinational companies, and American trade policy encouraged the supply of the high price U.S. market from much lower cost (and lightly regulated) foreign markets, wouldn’t many of these multinationals take the hint and send much of their capital abroad?

Nor are these scenarios hypotheticals. If you look at the business investment share of the U.S. economy, as pointed out by Dean Baker of the Center for Economic Policy Research (in a recent email), it grew steadily between 1950 (when it was 9.99 percent of pre-inflation gross domestic product) to 1980 (when it hit 14.21 percent). By 2007, the last year before the Great Recession struck, it had fallen back to 13.27 percent. Last year, it stood at 12.83 percent. (Unfortunately, the inflation-adjusted data only go back to 1999.)

Of course, such capital spending is driven by many forces. Baker, for example, emphasizes the destructive effects of financial deregulation, which greatly increased the rewards of short-term-focused speculative activity versus the longer-term gains generated by funding production and innovation. But can it be a total coincidence that domestic American business investment peaked just as imports – especially from predatory trading powers like Japan – were starting to make big inroads into U.S. markets?

Even more suggestive: Research published in 2014 by analyst Aaron Ibbotson of Goldman Sachs showed that U.S.-owned multinationals have not simply stopped or slowed investing in new plant and equipment. Instead, they’ve increasingly channeled such investment overseas, especially to emerging market countries like China, in order to supply their industrial needs.

Not that these are the only problems potentially and actually created by running trade deficits – especially big, chronic ones – that Irwin missed. For instance, when foreign interests buy American assets with trade surplus earnings, they buy control over the U.S. economy. This arguably is not a significant issue when the buyers are other private companies, or when they come from countries that are allied or friendly with the United States, or neutral. When a large and growing share of these acquisitions are made by China – which is neither friendly, nor private sector dominated – threats emerge ranging from market distortions (created by heavily subsidized financing arrangements) to national security dangers.

Irwin should have also mentioned that changing trade balances are crucial indicators of global competitiveness, and in fact signal which countries are likely to be major and minor producers of various goods and services. Indeed, the ostensibly most efficient possible global division of labor that results is a principal justification for encouraging trade. If manufacturing, to take one sector, is judged to create no special advantages for the American economy, then it’s fine to be indifferent to trade deficit signals that U.S. industry’s world-class status is at risk. If manufacturing is prized, then the deficit is indeed a valuable scorecard, and one that’s sending a troubling message.

Of course, Irwin’s column also argued that the strong dollar that puts constant upward pressure on the trade deficit creates major diplomatic and national security benefits for the United States, and there are respectable, if not dispositive, arguments to be made along these lines. But when it comes to the domestic growth, employment, and wage impact of trade deficits – not to mention the effects on all the productivity growth and innovation fueled by manufacturing – portrayals of these shortfalls as close-calls or nothing-burgers belong in a set of political talking points, not in a supposed economic primer.

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Current Thoughts on Trade

Terence P. Stewart

Protecting U.S. Workers

Marc to Market

So Much Nonsense Out There, So Little Time....

Alastair Winter

Chief Economist at Daniel Stewart & Co - Trying to make sense of Global Markets, Macroeconomics & Politics

Smaulgld

Real Estate + Economics + Gold + Silver

Reclaim the American Dream

So Much Nonsense Out There, So Little Time....

Mickey Kaus

Kausfiles

David Stockman's Contra Corner

Washington Decoded

So Much Nonsense Out There, So Little Time....

Upon Closer inspection

Keep America At Work

Sober Look

So Much Nonsense Out There, So Little Time....

Credit Writedowns

Finance, Economics and Markets

GubbmintCheese

So Much Nonsense Out There, So Little Time....

VoxEU.org: Recent Articles

So Much Nonsense Out There, So Little Time....

Michael Pettis' CHINA FINANCIAL MARKETS

New Economic Populist

So Much Nonsense Out There, So Little Time....

George Magnus

So Much Nonsense Out There, So Little Time....

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